Ben Bernanke

Great Depression Scholar

A diligent student of the Great Depression, much of Bernanke’s notable work focused on how the movements of the Fed and the use of monetary policy prolonged the Depression. When asked why he chose to study the Depression, even though it’s one of the more tangled and convoluted moments  in U.S. economic history, Bernanke gave a revealing answer.

"If you want to understand geology, study earthquakes," Bernanke said, according to his friend and fellow economist, Mark Gertler. “If you want to understand economics, study the biggest calamity to hit the U.S. and world economies."The Wall Street Journal, Lessons of the '30s: Long Study of Great Depression Has Shaped Bernanke's Views --- Fed Nominee Learned Perils Of Deflation, Gold Standard And Pricking of Bubbles --- A Grandmother's Explanation,’ Greg Ip, December 7, 2005

In 2002, when he joined the Fed as a governor he had to stop writing, “Age of Delusion: How Politicians and Central Bankers Created the Great Depression.” He finished 120 pages, and the book editor plans to publish the tome when Bernanke steps down from public office.The Wall Street Journal, Lessons of the '30s: Long Study of Great Depression Has Shaped Bernanke's Views --- Fed Nominee Learned Perils Of Deflation, Gold Standard And Pricking of Bubbles --- A Grandmother's Explanation,’ Greg Ip, December 7, 2005

While at M.I.T, Bernanke met his wife, Anna, and when she moved to Stanford University to study, he took a professor position at the school. Six years later, the couple moved to Princeton University where he received a tenured professorship. He would teach at Princeton for the next 17 years.

Living in Montgomery Township, N.J., Bernanke got his first taste of politics while working on the educational board of the town, and as chairman of the Princeton economics department.

“Ben is very good at respecting minority opinion and giving people the feeling they have been heard in the debate even if they get outvoted,” said Alan Blinder, a former Princeton colleague.Cassidy, John, ‘Anatomy of a Meltdown,” The New Yorker, Dec. 1, 2008 

Fed Governor

Although Bernanke joined the Fed as a visiting scholar in 1987, and worked on the Academic Advisory Panel at the Federal Reserve Bank of New York from 1990 until 2002, he showed very little desire to move into the public sector. But when President George W. Bush asked him to be a Fed governor in May 2002, Bernanke quickly said yes.http://www.federalreserve.gov/aboutt...d/bernanke.htm

But under powerful Fed Chairman Greenspan, Fed governors did not have much influence or control. Greenspan’s aggressive style left little time for discussion during meetings, but Bernanke still made his mark. He pushed for more clarity in the Fed’s plans, and wanted specific inflation targets that would prompt the body to set monetary policy to reach the specified goal. This would take some control out of the hands of the Fed chairman, and was in part aimed at turning the Fed chair into more technocrat than maestro of the global economy.

Although an explicit inflation target was controversial and never really gained steam at the time, Bernanke made an impression. In June 2005, Bush asked Bernanke to head the White House Council of Economic Advisers, and Bernanke agreed. However, he wouldn’t stay long.Bohen, Caren, ‘NEWSMAKER-Princeton’s Bernanke will bring fresh ideas to the Fed,’ Reuters News, May 8, 2002

When Greenspan stepped down as Fed chairman in January 2006, Bush nominated Bernanke. He was renominated by President Obama and confirmed for a second term in January 2009, despite a short-lived revolt from senators angered by the Wall Street bailout. Liberto, Jennifer, CNN Money, "Bernanke Gets a Second Term," Jan. 28, 2010

Subprime Mortgages

Bernanke failed to foresee the depth of the mortgage crisis or the degree to which the economy as a whole could be brought down by the popping of the housing bubble, one of the major stains on his record. When a wave of home foreclosures, mainly on risky subprime loans, hit during Bernanke’s first year at the Fed helm, he did not identify it as a major risk to the economy. As of May 2007, Bernanke still felt ''the effect of the troubles in the subprime sector on the broader housing market will likely be limited.''Lowenstein, Roger, The New York Times Magazine, ‘The Education of Ben Bernanke,’ Jan. 20, 2008

Three months later, Countrywide Financial announced it had serious doubts about its financial condition. Banks started hoarding money. This led to Bernanke’s first action to stem the growing financial crisis, cutting the discount rate, a bank lending rate, by a quarter percent to ensure banks had easy access to funds.

In January 2008, the economy seemed to be deteriorating more than even pessimists had forecast, and Bernanke cut interest rates twice — once, an emergency cut following a selloff on world stock markets and again barely a week later, for a total of 1.25 percentage points in two weeks. While Bernanke had indicated that he would stay out of tax and spending policy debates when he took office, he endorsed the idea of a fiscal stimulus to jumpstart the economy. In part due to his support, Congress passed a set of tax rebates in early February.

Rescue of Bear Stearns

In March 2008, the investment bank Bear Stearns was on the verge of going under, and Bernanke, along with New York Fed president (and Treasury Secretary) Timothy Geithner invoked Depression-era authority to make Fed loans available to the bank in order to facilitate a sale of the bank to J.P. Morgan. The Fed took the risk of loss on $29 billion in mortgage and other troubled assets in the transaction.

Bernanke and Geithner also started lending Fed money to all investment banks for the first time. The action, which occurred over a single weekend of round-the-clock meetings, was questioned at the time, as some in Congress and academia worried that the Fed had exposed itself to the risk of losses and created “moral hazard,” or incentive for firms to take on undue risk, knowing a bailout would come if they fail.http://www.washingtonpost.com/wp-dyn...040300439.html

Death of Lehman Brothers

In September 2008, when Lehman was on the verge of going under, the government allowed it to go bankrupt. That event spurred a meltdown of the global financial system, including the government takeover of insurance company American International Group two days later and the $700 billion government rescue soon after that. Bernanke has defended the decision not to bail out Lehman Brothers, arguing that because no other bank was willing or able to buy it, the Fed lacked the legal authority to save the firm as it had Bear Stearns.

The death of Lehman has been one of the most controversial moves — or non-moves — in Bernanke’s crisis arsenal. “Maybe there were arguments on either side before the decision,” “After the fact, it is extremely clear that everything fell apart on the day Lehman went under,” Princeton economist and former Fed vice-chair Alan Blinder said.Cassidy, John, ‘Anatomy of a Meltdown,” The New Yorker, Dec. 1, 2008

$700 Billion Bailout and Troubled Asset Relief Program

Bernanke urged Paulson to go to Congress to ask for more sweeping authority to rescue the financial system. “’We can’t keep doing this,’ Bernanke told Paulson. ‘Both because we at the Fed don’t have the necessary resources and for reasons of democratic legitimacy, it’s important that the Congress come in and take control of the situation.’”The Wall Street Journal, ‘Crisis Mode: Paulson, Bernanke Strained for Consensus In Bailout,’ Jon Hilsenrath, Deborah Solomon and Damian Paletta,’ November 10, 2008 Hat in hand, Paulson went to Congress and Bernanke publicly backed him. Congress would pass the $700 billion bailout on Oct. 3, 2008.Newsweek, ‘The Money Man; Meet Ben Bernanke, Depression scholar, unlikely superman,’ Michael Hirsh, October 27, 2008

In the final months of 2008, Bernanke took still more efforts to prop up the rapidly deteriorating economy. The Fed created the Commercial Paper Funding Facility, through which it essentially lends directly to corporate America by buying its short-term debt.

The Fed announced in November 2008 that it will, in conjunction with the Treasury Department, deploy $200 billion to prop up lending through credit cards, for student loans, auto loans, and small business loans, under the Term Asset Backed Securities Loan Facility. Also in November 2008, the Fed said it will buy $600 billion worth of securities from the government housing finance companies Fannie Mae and Freddie Mac, an effort that has sharply lowered consumer mortgage rates. In December 2008, the Fed’s policymaking committee cut short-term interest rates essentially to zero, and, with that tool for stimulating the economy exhausted, indicated that future Fed policy actions will rely on other strategies, such as expanding the new lending programs.

Finally, one move Bernanke has little control over but has advocated is providing relief to troubled homeowners.

"Steps that stabilize the housing market will help stabilize the economy as well," Bernanke said in a speech to a housing and mortgage conference.The Washington Post, ‘Bernanke Stirs Pot On Home Loan Help; U.S. Must Take Action, Fed Chairman Says,’ Neil Irwin and Dina ElBoghdady, December 5, 2008 

Future Regulation

In March 2009, Bernanke gave a speech in front of the Council on Foreign Relations in which he articulated some regulatory moves that he would back in order to minimize future downturns. Some of those changes included tweaking accounting rules and creating a regulator that would monitor systemic risks of companies. Bernanke said he supported changing the regulation system in a "holistic way."

"These crises have revealed some rather shocking gaps in our regulatory oversight," said Bernanke. "I mean, who was overseeing the subprime lenders, for example? Who was overseeing AIG? There simply wasn't enough adequate oversight in those cases."Shin, Annys and Montgomery, Lori, "Bernanke's Vision for Change," The Washington Post, March 11, 2009

Accounting rules known as "mark-to-market" value certain assets based on what the market would presently pay for them. When the market for mortgage assets plummeted, these rules pushed down the price of all the mortgage assets on companies' balance sheets. But many of these assets would not have been sold for years, so companies were forced to write-down the cost of these assets without taking into account its future worth. This rule worsened the downturn, Bernanke said.Shin, Annys and Montgomery, Lori, "Bernanke's Vision for Change," The Washington Post, March 11, 2009

"We should review regulatory policies and accounting rules to ensure that they do not induce excessive procyclicality--that is, do not overly magnify the ups and downs in the financial system and the economy," said Bernanke.Chairman Ben S. Bernanke Speech to the Council on Foreign Relations, March 10, 2009

"Stress Tests"

Starting in February 2009, the Federal Reserve began leading efforts to test the financial stability of the 19 largest banks in the U.S. Regulators wanted to test these banks deemed ”too big to fail” to see how they reacted if recessionary pressures, like jobless rates and home prices, worsened. With the help of the Federal Deposit Insurance Corporation and the Treasury Department’s Office of the Comptroller of the Currency, the Federal Reserve used hypothetical measures to see how each bank would react in a series of “what if” scenarios.

When the results of the stress tests were released in May 2009, many experts believed the banks would need at least an additional $100 billion. But, when the Treasury Department released the final tally, 10 of the 19 banks needed to raise only $75 billion of additional capital. Most of the banks would be able to do this by raising capital privately or converting the money supplied to them through TARP funds into common stock — this move would give the government a greater stake in the bank.Andrews, Edmund L., “Ailing Banks Need $75 Billion, U.S. Says,” The New York Times, May 7, 2009  

With the stress tests showing an overall positive outlook for the financial system, banks with sufficient capital started paying back TARP funds.“Geithner sees banks repaying even more TARP funds,” Reuters News, May 7, 2009,